stgs presentation 10 may 2016
TRANSCRIPT
LabyrinthConsultingServices,Inc. artberman.com 1
Returning To Market Balance: How Will Prices Respond? Art Berman Labyrinth Consulting Services, Inc. Ray Leonard Hyperdynamics
South Texas Geological Society San Antonio, Texas May 10, 2016
LabyrinthConsultingServices,Inc. artberman.com 2
AReturnToHigherOilPricesIsComplicated• Weareinthethirdoil-pricerallysincepricescollapsed—pricesare>60%higherthanin
January:$44vs.$27perbarrel.• Thisrallyissimilartotheprevioustwobutmayenddifferentlybecauseofimprovingmarket
fundamentalsandgrowingconcernaboutsupplyfromunderinvestment.• DatatodayfromEIAsuggeststhattheglobaloilmarketisreturningtobalance.• Recentworldevents—failureoftheDohaproductionfreeze,dismissalofAl-Naimi—havenot
affectedoilpriceslikeinthepast.• Theweakglobaleconomymaynotbeabletosustainmuchhigheroilprices.• Everyone’sbreak-evenpriceincludingOPEC’sishigherthancurrentprices.• TheU.S.E&Pbusinessisincriticalcondition.• Abalancedoilmarketdoesnotnecessarilymeanareturntohigheroilprices.• Becauseofaprofoundlychangedeconomyandassociatedmonetarypolicies,wehavecrossed
aboundaryandareturntohigheroilpricesiscomplicated.
LabyrinthConsultingServices,Inc. artberman.com 3
EnergyIsTheEconomy:TheContextforTheOil-PriceCollapse
• Peoplethinkthattheeconomyrunsonmoneybutitrunsonenergy–NateHagens.
• Today,oilandgasprices&theeconomymustbeviewedthroughthedebtlens.
• Theendofcheapoilandnaturalgasintheearly2000sledtofinancialdislocationsandultimately,theFinancialCollapseof2008.
• Becauseofresourcescarcity,oilpricesincreasedfromabaselineof$33/barrelinthe1990stoanaveragepriceof$99/barrelfromlate2010untilSeptember2014.
• Post-collapsemonetarypolicyfocusedonforcingconsumptionandinvestment:zerointerest&furtherexpansionofcredit.
• E&Pcompanieshadalmostunlimitedaccesstocapital.• Itisimpossibletounderstandandcriticallyevaluateshalegas
ortightoilwithoutthiscontext.
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WhatReallyControlsOilPrices?
• Futuresmarketscontroloilpricestoday.• Thesereflectacollectiveunconsciousthatincludesworldevents.• Massiveoilinventoriesskewthecontext.• Theworldeconomyisacasino.
LabyrinthConsultingServices,Inc. artberman.com 5
GlobalOilOutputandOver-Production:HowWeGotHere
• Over-productioncausedtheoil-pricecollapse:aclassicbubble.• Low-interestratesandcurrencydevaluationaftertheFinancialCollapseof2008-2008enabled
over-investmentandover-production:cheapmoneyandhighoilprices.• Higheroilpricesprovidedincentivetoproducemoreexpensive,unconventionaloil:tightoil
(shale),oilsandsanddeep-wateroil.• 7.1mmbpdincreasefrom2009-2015leadtoproductionsurplusbyFebruary2014thatpeakedin
May2015andagaininNovember2015.• Maincontributorstoover-production:U.S.+Canada,Iraq,BrazilandRussia.
60,000
62,000
64,000
66,000
68,000
70,000
72,000
74,000
76,000
78,000
80,000
82,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
ThousandsofBarrelsPerD
ay
World CrudeOil&CondensateProduction
Source:EIA&Labyrinth Consulting Services,Inc.
2003-2009ProductionPlateau~72.5mmbpd
2010-2015~7.1mmbpdincrease
0
0.5
1
1.5
2
2.5
3
3.5
4
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
MillionsofBarrelsofCrudeOilPerDay
IncrementalCrudeOilProductionSinceJanaury2014
U.S.+Canada Iraq Brazil Russia SaudiArabia Iran
U.S.+Canada
+1.3mmbpd
Iraq+1.1mmbpd
Russia +04
mmbpd
Saudi Arabia
+0.0mmbpd
Brazil-0.1
mmbpd
Productionfromthesecountrieswas3.03
mmbpdmoreinFeb2016thaninJan2014.
1.3mmbpdfromU.S.&1.1mmbpdfromIraq:
2.4mmbpd,78%ofincrease.
Russiaadded0.36mmbpd.
Iranincreased0.4mmbpd
sinceDecember2015.
Source: EIAandLabyrinthConsulting Services,Inc.
Iran
+0.4mmbpd
*Crude oilestimatedfromliquidsproduction forBrazil, Canada&Russia
LabyrinthConsultingServices,Inc. artberman.com 6
GlobalMarketBalanceandTightOilOver-Production
• Currentglobaloilmarketisover-suppliedby~0.57millionbarrelsofliquidsperday.• Productionsurplusincreasedto>3mmbpdbyMayandNovember2015&hasdeclinedsince
then.• Themarketismovingtowardbalance.• Consumptionhasincreased.EIAnowforecasts1.4mmbpdgrowthin2016.Howmuchis
consumptionbasedonlowprices?• Theoriginsofover-supplyofoilandlowoilpricesarefound,ironically,inincreasedscarcityof
petroleumresources.• Scarcerresourcesledtohigherpricesthatpermittedproductionofunconventionaloil.• Over-investmentbecauseofhighpricesandeasycreditledtoover-production,over-supplyand
loweroilprices.
LabyrinthConsultingServices,Inc. artberman.com 7
TheEndofCheapOil
• Oilpriceshaveonlybeenmorethan$90/barrel(March2016dollars)3times:aftertheoilshocksofthe1970sandearly1980s,beforethe2008FinancialCollapse,and2010-2014.
• Forthelast15yearsofthe20thcentury,oilpricesaveraged$33/barrelandwerepartlyresponsibleforeconomicprosperityintheUnitedStates(Reagan-Bush-Clintonera).
• LowpercentofGDPspentonenergy.• DuringtheAsianFinancialcrisisin1998,oilpricesreachedlowestlevelsince1950($16.49/
barrel).• Cheapoilendedintheearly21stcentury—flatproduction&increaseddemandfrom
developingworldespeciallyChina.• Longestperiod(44months)ofhighoilpricesaftertheFinancialCollapse.
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TheCollapseofWorldOilPrices
• Marketbalanceexpressedbyrelativesupplysurplusordeficit(supplyminusdemand).• PeriodofsupplydeficitbeforetheFinancialCollapsecontributedtohighoilprices.• AsupplysurplusbecauseoflowdemandaftertheFinancialCollapse(2008-2009).• Periodofsupplydeficitmostof2011-2014becauseofsupplyinterruptionsintheMiddleEast.• Growingsupplysurplusbeginningin1stquarterof2014causedcollapseofoilprices.• Thesurplusreachedamaximuminthe2ndquarterof2015(2.2mmbpd)andhasgenerally
improvedsincethenwithfallingproductionbutremainsmorethan1.5mmbpd.
LabyrinthConsultingServices,Inc. artberman.com 9
• LargereductioninE&Pinvestmentin2015andprobablyevengreaterin2016.• Deferredinvestmentsin2015equivalentto20billionbarrelsofreserves.• GlobalE&Pestimatedcapexfor2016is44%(-$412billion)of2014.• Asubstantialsupplydeficitwillresultinthenot-too-distantfuture.• Apricespikeseemsunavoidable.
TheBigPictureOnOilPrices:Under-Investment
LabyrinthConsultingServices,Inc. artberman.com 10
TheBigPictureOnOilPrices:E&PDebt
• OilcompanieshavereliedondebtduringgoodandbadtimessincetheFinancialCollapse.
• SecondaryshareofferingsinU.S.E&PcompaniesarealreadyhigherYTD2016thanin2015.
• Pioneer$1.4billion,Devon$1.3billion.• Investorsarelookingforthebottom.• ~$140billioninjunkbonddebtcomingdueover
next7years.• Hugebankexposuretoenergydebt.• Butcompaniesarespendingmorethanthey
earnfromoperations.
LabyrinthConsultingServices,Inc. artberman.com 11
TheBigPictureOnOilPrices:MonetaryPolicy
• Interestrateshavebeenalmostzerosincethe2008FinancialCollapse.• 8yearsofzero-interestratepolicyhavedistortedinvestmentsandthe
economy.• Investorsseekyieldbecausetraditionalinvestmentshavealmostnone.• U.S.E&Pcompaniesbecameanattractiveinvestmentbecauseofhighyieldand
relativelylowrisk.
LabyrinthConsultingServices,Inc. artberman.com 12
TheBigPictureOnOilPrices:MonetaryPolicy
• AnegativecorrelationbetweenthevalueoftheU.S.dollarandworldoilprices:agloballyconnectedeconomyinwhichcountriescompeteforinvestmentbasedoninterestratesandcurrencyvaluation.
• OiltransactionsaredenominatedinU.S.dollarsastheworldreservecurrency.• HigherU.S.interestratesfavorinvestmentsintheU.S.economyovercommoditieslike
oil.Whenthedollarisstrong,oilpricesaregenerallylowerandviceversa.• Thecorrelationbetweenoilpriceandthedollarisespeciallystrongsince2015and
partlyexplainspricecycles.• ThelatestpricerallybeganaftertheFederalReserveBankindicatedthatfurther
interestrateincreasesin2016wereunlikely.
80
82
84
86
88
90
92
94
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
4-Jan-16
11-Jan-16
18-Jan-16
25-Jan-16
1-Feb-16
8-Feb-16
15-Feb-16
22-Feb-16
29-Feb-16
7-Mar-16
14-M
ar-16
21-M
ar-16
28-M
ar-16
4-Ap
r-16
11-Apr-16
18-Apr-16
25-Apr-16
2-May-16
9-May-16
WallStre
etJo
urnalD
ollarIndex
NYMEXW
TIPrice($/Barrel)
NYMEXWTIPrice&WSJDollarIndex
WTINYMEXPrice WSJDollarIndex
$26!Support
$36!Support
WTI!(LHS)Dollar Index!(RHS)
Source: EIA,WallStreetJournal&LabyrinthConsultingServices,Inc.
Longdollar!futures!bets!sold!on!doubts!about!Fed!rate!hikes
Declining!dollar!value
$46!Resistance
LabyrinthConsultingServices,Inc. artberman.com 13
PriceCycleTrendsandPriceVolatility
• Oilpricesincreasedfrom$26to$46perbarrelduringthecurrentJanuary–Maypricerally.• ThiswasbasedpartlyonhopeforanOPEC-plus-Russiaproductionfreezebutmostly,thecollectiveunconscious
wasfedupwithlowoilprices.• Thereweretwomajorpricecyclesin2015:March-August($44-$60-$38perbarrel)andAugust-January($38-
$49-$27perbarrel).• Bothofthesecycleslastedapproximately150days(5months).• Oil-pricevolatilitywasgenerallyhighatthebeginningsandendsofthecyclesandgenerallylowduringtheir
peaks.
LabyrinthConsultingServices,Inc. artberman.com 14
ThePresentPriceCycle
• Pricesincreasedfrom$26.55to$33.62inlateJanuaryandthendroppedto$26.21onFebruary11.• This$27“double-bottom”patternprobablytestedthesupportlevelforthegreateroil-pricecollapsethatbeganinJune
2014.• Pricesincreasedto$41.45onMarch22overaperiodof40days,thenfellto$35.70overthenext12daysbefore
peakingat$46.03onApril28.$46wastheupperresistancelevel.• The$35.70lowprobablytestedasupportlevel.• Pricesarenowfluctuatingbetween$42and$44/barrel.• Volatilitypatternsgenerallyareconsistentwithearliercyclesbutitistooearlytosayhowthesearedeveloping.• Thetotaldurationofthiscycleis109dayssofar.
LabyrinthConsultingServices,Inc. artberman.com 15
U.S.ProductionDecline
• Marchproductionfellto8.98millionbarrelsperday,100,000barrelsperdaylessthaninFebruary.
• 720,000barrelsperdaylessthanpeakproductioninApril2015.• EIAforecaststhatproductionwilldropanother880,000barrelsperdaybySeptember2016fora
totaldeclineof1.6millionbarrelsperdaycomparedtoApril2015.• AverageQ12016declinerateof60,000bpd/month.
9.34 9.45 9.65 9.69
9.48
9.32 9.43
9.41 9.45
9.38
9.33
9.25
9.18
9.13
9.07
8.98
8.75
8.60
8.47
8.22
8.10 8.19 8.26
8.25
8.23
8.22
8.24
8.25
8.20
8.15
8.18
8.05
7.99 8.16 8.29 8.33
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
3
4
5
6
7
8
9
10
11
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-1
5
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-1
6
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-1
7
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
WTIPrice($/Barrel)
MillionsofBarrelsofCrudeO
ilPerDay
U.S.CrudeOilProduction andForecast
CrudeOilProduction WTI
720!kbpd!decline!since!April!2015(100 kbpd!since!March)
Oil!Production(LHS)
WTI!Price!(RHS)
Source:EIAMay 2016STEO&LabyrinthConsultingServices,Inc.
1.6!mmbpd!decline!forecast!by!Sept!2016
LabyrinthConsultingServices,Inc. artberman.com 16
InventoriesRemainAnObstacleToPriceRecovery
• U.S.stocksarenearrecordhighlevelsof543millionbarrels:61millionbarrelsmorethanatthistimein2015and137millionbarrelsmorethanthe5-yearaverage.
• OECDstocksarealsoatrecordlevelsof3.13billionbarrelsofliquids.• Thatis359millionbarrelsmorethanthe5-yearaveragebut54%ofthosevolumesare
U.S.stocks.
2.4
2.5
2.6
2.7
2.8
2.9
3
3.1
3.2
January February March April May June July August September October November December
BillionsofBarrelsofLiquids
OECDLiquids Inventories
2015 2014 2013 2012 2011 2016
2016!Inventory
359!mmb!above the!5-year!average192!mmb!(54%)!is!USA 2015
20142012
20132011
Source:EIA&LabyrinthConsultingServices,Inc.
LabyrinthConsultingServices,Inc. artberman.com 17
ComparativeInventoriesAreFalling
• Comparativeinventoryisdeterminedbycomparingcurrentstockswithamovingaverageofstocksoverthepast5years.
• Thetwopreviouspricecyclesin2015werebothcharacterizedbyfallingcomparativeinventories.WhenC.I.patternsreversed,pricesfell.
• Thecurrentpricecycleshowsadecreaseincomparativeinventories.• Front-to-backfuturesspreadstypicallyfallwithdecreasinginventoriesbecauseshort-
datedcontractsgainvaluecomparedtolonger-datedcontracts.• Thepasttwocyclesendedbecauseproducersincreaseddrillingandproductionat
higherprices.
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
0
20
40
60
80
100
120
1/2/15
1/16
/15
1/30
/15
2/13
/15
2/27
/15
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3/27
/15
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/15
4/24
/15
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/15
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6/19
/15
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/15
7/31
/15
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/15
8/28
/15
9/11
/15
9/25
/15
10/9/15
10/23/15
11/6/15
11/20/15
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12/18/15
1/1/16
1/15
/16
1/29
/16
2/12
/16
2/26
/16
3/11
/16
3/25
/16
4/8/16
4/22
/16
December-June2016FuturesP
riceSpread(DollarsPerBarrel)
ComparativeInventory(M
illionsofB
arrelsofCrudeOIl)&W
TIPrice($/Barrel)
Cushing+GulfCoastComparativeInventories
FuturesSpread WTI Comparative Inventory
Dec-June!2016!Futures!Price!Spread!(RHS)
Comparative!Inventory!(LHS)
WTI!(LHS)March!-August!2015!
Source:EIA,CME&Labyrinth Consulting Services,Inc.
August!-October!2015!Price!Cycle
March!-April 2016!Price!Rally
Falling!ComparativeInventories
Falling!ComparativeInventories
LabyrinthConsultingServices,Inc. artberman.com 18
CrudeOilInventories,OilConsumptionandWTIPrices:2016PriceRally
• Inthecurrentpricerally,consumptionhasincreasedfollowingrecordlowpricesfromDecember2015throughFebruary2016.
• Veryhighstocklevels.• Consistentproductiondeclineof~60,000barrelspermonthsinceSeptember2015.• 100,000barrelperdaydeclineinAprilislargestmonthlydropsofar.• During2015pricerally,$15perbarrel(41%)priceincreasekilledconsumption.• Incurrentrally,peakpricewasalmost$17abovebaselinewithgreaterpercentincrease(63%)
than2015.
9.34 9.45 9.65 9.69
9.48
9.32 9.43
9.41 9.45
9.38
9.33
9.25
9.18
9.13
9.07
8.98
8.75
8.60
8.47
8.22
8.10 8.19 8.26
8.25
8.23
8.22
8.24
8.25
8.20
8.15
8.18
8.05
7.99 8.16 8.29 8.33
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
3
4
5
6
7
8
9
10
11
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-1
5
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-1
6
Aug-16
Sep-16
Oct-16
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Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-1
7
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
WTIPrice($/Barrel)
MillionsofBarrelsofCrudeO
ilPerDay
U.S.CrudeOilProduction andForecast
CrudeOilProduction WTI
720!kbpd!decline!since!April!2015(100 kbpd!since!March)
Oil!Production(LHS)
WTI!Price!(RHS)
Source:EIAMay 2016STEO&LabyrinthConsultingServices,Inc.
1.6!mmbpd!decline!forecast!by!Sept!2016
7
7.5
8
8.5
9
9.5
$0
$10
$20
$30
$40
$50
$60
$70
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-1
5
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
Consum
ption/2.5&Stocks/60(M
illionsofBarrels)
WTIPrice($/Barrel)
U.S.Consumption, Stocks&WTIPriceWTIPrice Consumption Stocks
WTI!Price (LHS)
Consumption!(RHS)
Stocks!(RHS)
Source:!EIA&!Labyrinth!Consulting!Services,!Inc.
Apr-JunPrice!Rally
Sept-OctPrice!Rally
Mar-May!Rally
LabyrinthConsultingServices,Inc. artberman.com 19
TheLong-TermPerspectiveOnOilPrices
• Averageoilprice1950-Present:$45perbarrel.• Modaloilprice:$25perbarrel.• Presentprice:$44.68perbarrel.• 1986-1999:$33perbarrel.• Theendofcheapoilinthe21stcenturyledtofinancialdislocationsand
ultimately,theFinancialCollapseof2008.
LabyrinthConsultingServices,Inc. artberman.com 20
APerspectiveOnBreak-EvenPrices
• Therehasbeenalottalkaboutlow-andhigh-costproducerssincetheoil-pricecollapseof2014.
• IMFpublishedfiscalbreak-evenpricesforOPECin2015.• Wehavedeterminedbreak-evenpricesforthecoretightoilplaysintheU.S.• Everyoneneedspriceshigherthantoday’stobreakeven.• Realistically,$70perbarrelistheminimumforthemostlower-costproducers.• MostOPECmembersneedmorethan$80tobreakeven.• U.S.tightoilplayslookprettygoodinthiscompany!
$137
$119$115
$110
$97 $95$89 $89 $86
$71 $70 $69 $67 $65
$49
$0
$20
$40
$60
$80
$100
$120
$140
$160
Yemen
Iran
Algeria
Bahrain
Libya
Oman
Qatar
Average
SaudiA
rabia
Perm
ianCore
UAE Iraq
EagleFordCore
BakkenCore
Kuwait
FiscalBreak-EvenPrice(DollarsPerBarrel)
IMFProjected2016FiscalBreak-Even&U.S.TightOilPrices
Source: IMF!&!Labyrinth!Consulting! Services,!Inc.
LabyrinthConsultingServices,Inc. artberman.com 21
TightOilE&PCompaniesAreFailing
• U.S.tightoilandshalegasE&Pcompaniesarefailingbasedonfirstquarter2016earningsreports.
• Allthetightoil-weightedcompanieshadnegativecashflowinQ12016exceptEPEnergyandOccidentalPetroleum.
• Onaverage,companiesspenttwiceasmuchastheyearned;manyspent>2.5x.• 15-foldincreaseindebt-to-cashflow.1992-2012averagewas1.5.Q12016was33.0.• Companiesaremanagingtheirnegativecashflowbyspendingalmostnothingand,
therefore,earningalmostnothing.• Thosewhobelievethatthingswillreturntonormalwithsomewhathigheroilpricesneed
tothinkagain.
LabyrinthConsultingServices,Inc. artberman.com 22
AReturntoHigherOilPricesIsComplicated
• Thecurrentpricecyclemayrepresentthebeginningofanoil-pricerecovery.• Theglobalmarketappearstobemovingquicklytowardbalancewithhigherconsumptiongrowth.• Comparativeinventoriesarefalling.• Chartpatternssuggestthatabottommayhavebeenestablishedat$26-$27perbarrelandat$36/barrel.• Thelikelypathforwardwillbemorepricecyclesbutthistime,withhigherratherthanlowerendingprices.• Whatisareasonablepricerecoverylevel?Historysuggests$45perbarrelbuteveryoneneedsmorenowto
breakeven.Evenwithmarketbalance,priceswillprobablynotreturnto2011-2014”normal”prices.• Aweakglobaleconomyandweakerdemandwithhigheroilpricesarethebiggestriskstooil-pricerecovery.• Wecrossedaboundaryin2014andoldrulesnolongernecessarilyapply.